$2.95 million and threatened to foreclose on Orchard if the
complex was not sold for that price. Unbeknownst to Orchard,
however, Germania also contracted with Michel and Potter (as
Michel-Potter Properties), whereby Michel-Potter would purchase
the complex from Orchard, then sell it to third party investors
for whom Germania would finance the purchase. The investors
would then sell the condos to individual buyers (which sale
Germania also would finance).
The upshot of the transaction was this: Michel-Potter bought
Orchard for $2.95 million and then, on the same day, sold it to
a group of investors for $4.4 million — thereby making a
healthy profit. Meanwhile, Germania substituted a $2.7 million
mortgage at 8.75% for a $4.4 million mortgage at 14.5%.
(Orchard knew nothing of Michel-Potter's subsequent sale until
September of 1984 — nearly four years later.)
In support of their RICO claims, Plaintiffs assert that
Defendants committed numerous acts of mail and wire fraud, that
they were involved in a scheme to defraud Plaintiffs, and that
the "continuous association of Defendants in the enterprise
while committing the unlawful acts . . . constitutes a pattern
II — Motion to Dismiss
In ruling on a motion to dismiss, the Court "must accept the
well pleaded allegations of the complaint as true. In addition,
the Court must view these allegations in the light most
favorable to plaintiff." Gomez v. Illinois State Board of
Education, 811 F.2d 1030, 1039 (7th Cir. 1987). The applicable
rules do not necessitate a detailed outline of the claim's
basis. Ellsworth v. City of Racine, 774 F.2d 182, 184 (7th Cir.
1985), cert. denied, 475 U.S. 1047, 106 S.Ct. 1265, 89 L.Ed.2d
574 (1986). Still, a "complaint must contain either direct or
inferential allegations respecting all the material elements
necessary to sustain a recovery under some viable legal
theory." Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101,
1106 (7th Cir. 1984), cert. denied, 470 U.S. 1054, 105 S.Ct.
1758, 84 L.Ed.2d 821 (1985). Applying the above standards, the
Court now turns to the case at bar.
III — Civil RICO
Plaintiffs bring this action pursuant to 18 U.S.C. § 1962(a).
See 18 U.S.C. § 1964(c) (providing for civil cause of action by
"any person injured" by a section 1962 violation). The
existence of a pattern of racketeering activity is an essential
element of a section 1962 claim. Tellis v. United States
Fidelity & Guaranty Co., 826 F.2d 477, 478 (7th Cir. 1986). The
act provides that a pattern of racketeering activity "requires
at least two acts of racketeering activity."
18 U.S.C. § 1961(5). The Seventh Circuit has decided numerous cases in
recent years which attempt to give meaning and scope to the
pattern requirement. See, e.g., SK Hand Tool Corp. v. Dresser
Industries, Inc., 852 F.2d 936 (7th Cir. 1988); Jones v. Lampe,
845 F.2d 755 (7th Cir. 1988); Medical Emergency Service
Associates v. Foulke, 844 F.2d 391 (7th Cir. 1988); Liquid Air
Corp. v. Rogers, 834 F.2d 1297 (7th Cir. 1987); Appley v. West,
832 F.2d 1021 (7th Cir. 1987); Marshall & Ilsley Trust Co. v.
Pate, 819 F.2d 806 (7th Cir. 1987); Skycom Corp. v. Telstar
Corp., 813 F.2d 810 (7th Cir. 1987); Marks v. Pannell Kerr
Forster, 811 F.2d 1108 (7th Cir. 1987); Tellis v. United States
Fidelity & Guaranty Co., 826 F.2d 477 (7th Cir. 1986); Elliott
v. Chicago Motor Club Insurance, 809 F.2d 347 (7th Cir. 1986);
Morgan v. Bank of Waukegan, 804 F.2d 970 (7th Cir. 1986); Lipin
Enterprises, Inc. v. Lee, 803 F.2d 322 (7th Cir. 1986).
The circuit court has held that whether a pattern exists is
a fact-specific question involving many relevant factors
including: (1) the number and variety of predicate acts and the
length of time over which they were committed; (2) the number
of victims; (3) the presence of separate schemes; and (4) the
occurrence of distinct injuries. Jones, 845 F.2d at 757.
Although none of these factors, standing alone, is controlling,
they provide the framework through which we must determine
whether the requisite "continuity plus relationship" exists.
Id.; see Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.
14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985). We are
further guided by the principle that, although the Court in
Sedima expansively construed the
general civil RICO provisions, it defined the pattern
requirement narrowly. Jones, 845 F.2d at 756. Also, we review
this cause against the backdrop of the Seventh Circuit's
observation that: "Our cases demonstrate an expansive reading
of civil RICO, but only where a true `pattern' of prohibited
activity, not just sporadic or isolated instances of fraud, are
shown." Id. at 757.
Finally, we are guided by the Supreme Court's recent decision
in H.J. Inc. v. Northwestern Bell Telephone Co., ___ U.S. ___,
109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). In that case, the Court
addressed RICO's pattern requirement, rejecting the idea "that
predicate acts of racketeering may form a pattern only when
they are part of separate illegal schemes. Nor can we agree
with those courts that have suggested that a pattern is
established merely by proving two predicate acts. . . ." Id.
109 S.Ct. at 2899. In attempting to find a middle ground, the
Court found that "a plaintiff or prosecutor must show that the
racketeering predicates are related, and that they amount to or
pose a threat of continued criminal activity." Id. at 2900
(emphasis in original). This, of course, is no more than what
we were told in the famous footnote 14 of Sedima that there
must be "continuity plus relationship" among the various acts
of racketeering to constitute a pattern. Sedima, 473 U.S. at
496 n. 14, 105 S.Ct. at 3285 n. 14. Trying to flesh out this
concept, however, the Court in H.J. Inc. attempted to define
the concepts of continuity and relationship which have divided
the circuit courts since Sedima.
The Court defined the relationship prong as follows:
"`criminal conduct forms a pattern if it embraces criminal acts
that have the same or similar purposes, results, participants,
victims, or methods of commission, or otherwise are
interrelated by distinguishing characteristics and are not
isolated events.'" H.J. Inc., 109 S.Ct. at 2901-02 (quoting
18 U.S.C. § 3575(e)). In describing continuity the Court stated:
What a plaintiff or prosecutor must prove is
continuity of racketeering activity, or its
threat, simpliciter. . . . "Continuity" is both a
closed- and open-ended concept, referring either to
a closed period of repeated conduct, or to past
conduct that by its nature projects into the future
with a threat of repetition. . . . A party alleging
a RICO violation may demonstrate continuity over a
closed period by proving a series of related
predicates extending over a substantial period of
time. Predicate acts extending over a few weeks or
months and threatening no future criminal conduct
do not satisfy this requirement: Congress was
concerned in RICO with long term criminal conduct.
The gist of the Court's opinion was that it struck down the
Eighth Circuit's rule that a single fraudulent effort or scheme
is insufficient to establish a pattern of racketeering
activity. However, as Justice Scalia stated in his concurrence,
the Court's striking of the Eighth Circuit rule is "the Court's
only substantive contribution to our prior guidance."
Id. at 2908 (Scalia, J., concurring). Thus, H.J. Inc. does
little, if anything, to change the Seventh Circuit precedent
upon which we rely to adjudicate the instant motion.
We now move to the merits of the motion. In an order entered
February 5, 1987, this Court found:
Plaintiffs have alleged that the Defendants
committed several acts of mail and wire fraud over
a period of several months in furtherance of a
scheme to defraud them. In addition, Plaintiffs
claim that the Defendants' overall scheme was
directed toward other investors: a factor which
tends to indicate the existence of a pattern. The
acts of fraud are distinct; some relate to the
initial agreement to sell the property, while
others relate to the alleged duping of investors
other than the Plaintiffs. As in Morgan, while
these acts can be viewed as part of a single
overall scheme, they were ongoing over a period of
months in addition to being distinct acts.
Therefore, Plaintiffs have met their burden of
alleging both the continuity and relationship
prongs of the pattern requirement.
Since the date of that order, several Seventh Circuit cases
have clarified the phrase "pattern of racketeering activity."
Jones v. Lampe, 845 F.2d 755 (7th Cir. 1988); SK Hand Tool
Corp. v. Dresser Industries, Inc., 852 F.2d 936 (7th Cir.
1988); Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir.
In Jones, plaintiffs owed money to Bartelso Savings Bank. The
plaintiffs alleged that the bank induced them to apply for an
SBA guaranteed loan intending to fraudulently misappropriate
the money to offset the existing indebtedness. Meanwhile, the
bank continued to make unsecured loans to the plaintiffs to
"string them along" during the loan application process. The
plaintiffs attained the loan and the bank misappropriated the
money by applying it to the existing debt in violation of SBA
restrictions and the terms of the loan agreement. The
plaintiffs also alleged that defendants made false
representations to SBA in an attempt to cover up the
misappropriation of approximately $191,000. The complaint
alleged that defendants committed 120 separate predicate acts,
most involving mail fraud, to injure four victims: The Dan E.
Jones Hardwood Lumber and Milling Company (DEJ), Dan and Judy
Jones, and SBA.
The district court granted the defendant's motion to dismiss
the complaint. Affirming the dismissal, the circuit court found
that the facts as alleged by the plaintiffs showed only one
general scheme (which took several months to complete),
concerned one major transaction (the SBA loan), had four
potential victims (the Joneses, DEJ, and SBA), caused one
distinct injury (the wrongful conversion of the loan proceeds),
and threatened no repeated harm. Jones, 845 F.2d at 758. The
court concluded that these facts do not constitute a pattern
under civil RICO.
In the instant case, the facts as alleged by Orchard show
only one general scheme (which took several months to
complete), concerned only one major transaction (the sale of
the property substantially below its value), had one actual
victim (the Orchard Hills Cooperative Apartments), caused one
distinct injury (the sale of the property for approximately
$1.5 million below its actual market value), and threatened no
Similarly, in SK Hand Tool, the plaintiff alleged that the
defendant engaged in multiple acts of mail and wire fraud to
misrepresent the value of a division of Dresser Industries.
Plaintiff purchased the division of Dresser for what it alleged
to be an excessive price. The circuit court affirmed the
dismissal of the RICO count on the grounds that defendant's
actions resulted in only one transaction which caused one harm
to one victim. SK Hand Tool, 852 F.2d at 940. That case is thus
the mirror image to the case before us. Orchard has only
alleged multiple predicate acts which resulted in one
transaction causing a single harm to a single victim.
In Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir.
1989), plaintiffs, four oil suppliers, alleged that defendants
orchestrated two separate fraudulent schemes. The first
involved the use of false financial statements by defendants to
obtain lines of credit from three of the plaintiffs. The second
scheme involved multiple acts of mail and wire fraud,
bankruptcy fraud, and arson. The gist of the scheme was to take
fuel from plaintiffs' automatic terminals rapidly enough to
obtain huge amounts before plaintiffs' automatic billing
mechanisms could terminate defendants' credit. The court
affirmed a jury verdict for plaintiffs. The circuit court
stated that defendants' actions harmed four different victims
in the same manner, and the injuries were inflicted through a
variety of independent sequential actions. Thus, Ashland Oil is
clearly distinguishable from the instant case. Orchard has
alleged only a single transaction which caused a single harm to
a single victim.
The Seventh Circuit's most recent decision construing the
"pattern of racketeering activity" requirement is
Management Computer Services, Inc. v. Hawkins, Ash, Baptie &
Co., 883 F.2d 48 (7th Cir. 1989). In this case, the plaintiff,
a computer software designer, alleged defendant copied and used
certain software without authorization. The court affirmed a
judgment for defendant on the RICO count finding that the case
was "essentially a contract dispute involving one `victim,' one
transaction between the parties, and, at most two predicate
acts — the alleged unauthorized copying of the contract
programs and the . . . backup tapes." The case before us is
essentially similar in that it involves one victim and one
IV. Constitutionality of RICO
Apart from the language construing RICO's pattern
requirement, Justice Scalia's concurrence in H.J. Inc. is
significant for the following statement:
No constitutional challenge to this law has been
raised in the present case, and so that issue is
not before us. That the highest Court in the land
has been unable to derive from this statute
anything more than today's meager guidance bodes
ill for the day when that challenge is presented.
In consideration of the Court's holding and this language (some
might say "invitation") from Justice Scalia, this Court ordered
Defendants to brief the Court on any issues raised by H.J.
Inc., including those of constitutional dimension, which bore
on the instant motion. That order resulted in Defendants'
challenge to RICO on constitutional grounds.*fn1 However, our
disposition of the Defendant's motion to dismiss makes it
unnecessary for us to reach the constitutional issue.
Our resolution of Defendants' motion to dismiss the RICO
counts of the complaint (Counts IV, V, and VI) leaves only
three pendent state claims remaining. This Court generally will
not exercise jurisdiction over pendent state law claims when
all federal claims are dismissed prior to trial. Plaintiffs are
free to pursue these claims in state court.
Ergo, in light of recent Seventh Circuit decisions further
defining RICO's "pattern of racketeering activity" requirement,
Defendants' motion to dismiss Counts IV, V, and VI of
Plaintiffs' first amended complaint is ALLOWED with prejudice.
The remaining state law claims are DISMISSED without prejudice.